Lower ratings could pinch TV ads

Meg James and Alana SemuelsLos Angeles Times Staff Writers

Are advertisers the next to be shut out in the writers strike?

With the strike expected to extend into the new year, broadcasters are beginning to feel pressure from advertisers that are worried about lower ratings after the networks run out of fresh episodes of popular scripted shows.

The writers strike has come amid an already disappointing season, particularly for NBC, CBS and ABC, whose prime-time ratings are down compared with last season. NBC's prime-time ratings in the key advertising category of viewers aged 18 to 49 are down 11% compared with last season; CBS is down 10% and ABC is off 5%.

January and February, when fresh episodes will run out, could be even worse.

"There's a lot of uncertainty all coming together at once," said Brad Adgate, research director for ad firm Horizon Media.

For starters, there has been no breakout hit this season. Also, the networks changed the way they sold advertising time, resulting in slightly lower ratings for which they now have to compensate advertisers. Finally, the strike has halted production, forcing the networks into reruns and reality shows.

The strike is "another setback in a series of setbacks for the networks," Adgate said.

ABC, CBS, NBC, Fox and the CW network sold $9.3 billion in prime-time ads for this season. In the process, they sold about 80% of their time, holding back some to give advertisers should ratings fall short of guarantees. The remainder is sold later.

Although the decision to sell such a large percentage of their commercial time earlier in the year appeared to be a smart decision, it could come back to haunt the networks if their program schedules unravel.

"There is a great deal of concern about what the schedules are going to look like in 2008," said Harry Keeshan, an executive vice president of PHD USA, an ad agency whose clients include Jeep and Charles Schwab. "When we get into the first quarter of next year, that's when it will start to bubble up."

Analyst estimates about the financial effect on the networks vary, ranging from $300 million to $600 million in lost advertising, if the strike continues for several more months. Although those figures sound high, executives say the damage might not be severe. Lower-cost substitute programming might mitigate -- at least in the near term -- financial pain, they say.

"We are certainly not going to go dark," Leslie Moonves, chief executive of CBS Corp., told investors last week at a conference. "Ratings probably will not be as high without the influx of our great original programming. But, by the same token, costs will be down considerably."

Nonetheless, the lower cost might come with a price. Network audiences fell about 10% during the 1988 writers strike when disaffected network TV viewers switched to cable channels to sample new shows. Indeed, the influx of viewers helped to put such cable channels as TNT and CNBC on the map, further splintering the audience.

This time the Internet could be a big winner. And where viewers go, ad dollars follow.

"We believe that with each day the strike persists, broadcast programming's hold on viewers, and potentially advertisers, is weakening," said Douglas Anmuth in a Lehman Bros. research note Friday. "Advertisers could be forced to reallocate ad dollars to other media if broadcast ratings fall short of guarantees made."

When a show's ratings fall short of a guarantee, networks give advertisers "make goods" -- free ad time to make up for the shortfall. And because ratings are down this season, networks have had to use up some of their spare inventory to compensate advertisers for lower ratings. That means they have less time to sell.

That pressure became evident Tuesday when NBC confirmed that it had taken the highly unusual step of returning cash to advertisers to compensate them for prime-time ratings shortfalls from earlier in the year. NBC remitted about $10 million, according to a person familiar with the situation.

"This represents an extremely small portion of NBC's business and accommodates the changing needs of our clients' marketing plans," NBC said.

CBS and ABC also are providing advertisers make-good time, but those networks said they were not returning cash to advertisers. But if the strike continues well into the new year, then some ad buyers are worried that the networks will run out of leftover time to compensate for the lower ratings.